Three Narratives on the Changing Face of Global Commodities Market Structure

Abstract:
The commodity market structure has changed at an incredible pace in the last 20 years and is now subject to intense scrutiny by academics and policy-makers. Taking a long-term view of price formation, empirical findings show that international trade and finance, mostly driven by emerging markets demand, market liberalisations and technological developments in market infrastructure, have increased pro-cyclicality and interconnection among physical commodity markets. Price formation mechanisms are more sensitive to information flows. The interconnection with the financial system is strong and so the transmission of shocks from the financial system to commodity physical and futures markets. The rise of commodity-linked financial transactions was an important contribution to those developments. WTO commitments in international trade and expansionary monetary policies have promoted greater financial participation and so interconnection, which is also expressed by a greater pooling of commodity returns with returns of financial indexes (also defined here as the true ‘financialisation’ process). This paper represents an introduction to the functioning and structure of modern commodity markets. Three narratives emerge as key drivers of the modern global market structure: international trade, international finance and trading technology.